Wednesday, March 17, 2010


During this morning's news browsing I saw a headline that read something to the effect of, "Move to private market would be a disaster for the insured." No doubt they are referring to data like this which shows that for the years 2001-2003 family coverage in the individual market cost almost 17% of family income. For lower income groups the percentage was even higher. And with health care costs expected to rise, one can assume that these percentages will go even higher.

Looking at numbers, one might be tempted to agree with our overly dramatic headliner writer, but this would be a mistake.

The primary source of insurance in the country is employer sponsored group insurance, which costs much less than individual coverage. Some of this discrepancy is explained by the favorable tax treatment of employer-provided insurance premiums, but some of it must be due the large market for employer-sponsored group coverage and the competition that takes place in that market.

The doomsday scenario trumpeted in the headline above assumes that as people move from the group to the individual insurance market, the individual market will look just as it does today, when it is a much smaller piece of the overall health insurance market. The idea that the individual insurance market would be unchanged by a dramatic increase in participation is absurd.

Increased competition and choice will drive down the costs of insurance premiums, even in the individual market. Democrats touting the Obama plan are often overheard muttering these words like an incantation over the ridiculously tall stack of dead trees that constitute their proposal, but I remain unconvinced that buried in there is anything that will help to increase either competition or choice.

Think of the history of the market for telephones and phone service:

The 60s saw "alien" equipment slowly being connected to Bell System lines. Phone attachments were on the rise and customer-owned [oh the horror!] telephones were being installed at an alarming rate...alarming to the Bell System. It spawned a whole new industry; the "interconnect industry."

...In 1983 the government--Judge Harold Greene--had successfully torn apart the Bell System....

Was it good for the country, the economy? Well, depends on who you ask. Some argue that splitting the Bell System meant a more rich field for technological advances. However, Bell Labs had hundreds if not thousands of advancements...inventions. As far as the prediction of higher service costs, it seems that has not materialized as we see that long distance offerings are cut-throat and companies are competing on a price-alone basis.[E.A]

But health insurance is not a telephone, it's different you say. I say that for healthy people, you know, the vast majority of us, it isn't, but fine. How about food?

In 1932 food spending took up about 22% of disposable income, in 2008 it was less than 10%. No doubt this was due to the rising incomes and falling prices that come from productivity gains and increases in efficiency, not only of farming, but of transportation and thousands of other industries.

It's this combination of broad-based economic growth and improving efficiency (that is to say, better outcomes per dollar) that is the real prescription for fixing health care.

Sometimes the more things change, the more they actually change. Pretending that they won't may make for attention-grabbing headlines, but it makes for lousy policy.

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